05 Jul 2012 – " Stand and Deliver " (Adam & The Ants, 1981)

Opening quotes ahead of the ECB meeting (plus BoE) plus auction: split RN/ROff. Everything mostly unchanged, but Italy and Spain out by 5 and 10, respectively. Credit somewhat wider, too. Equities and EUR about unchanged. Commodities right where left at European COB.

Asia closed about flat to slightly negative, too, under pressure by weaker China equities, where stimulus measures, were they to come, will probably meet new bank liquidity ratios to keep things under control. Might drag us down back to YTD / 1-year lows at 2132. So, no free-for-all liquidity…

Stand (-by) and (waiting for the CBU Central Banks United to) Deliver…

Spanish bonds to be auctioned softer by about 10bp at 4.99%, 5.56% and 6.48% (from COB 4.88%, 5.45% and 6.37%). Added a couple of bps ahead of auction results publication.

Auction results were on target for a EUR 3bn scoop of 1.24bn 3s at 5.086% (5.46% 2 weeks ago), EUR 1bn Oct 16s at 5.536% (last 5.35% early June) and a slice of EUR 747m 10s at 6.43% (last 6.04% early June), so hefty concessions to yesterday’s closing prices and on the short end even to this morning’s quotes. As a reminder, these are average rates. The stop-out rates were at 5.197%, 5.621% and 6.505%, so consequent tails of 11, 8.5 and 7.5bp were needed to reach the targeted amount. Explains why the immediate post-auction wasn’t a huge relief rally and the short end getting further weighted down.

French auction on the heels with slightly EUR 7.8bn with EUR 1.75bn 2019 at 2.02% (1.92% on 07Jun), EUR 4.7bn 10s at 2.53% (last 2.46%) and 1.4bn 2023s at 2.70%. Pretty much a non-event. Wider levels, but Bunds are equally wider since the 1.37% 07 Jun close).

Heading into lunch / pre-ECB stand-by on the same levels. Everything about unchanged. Italy out by 5 in about unchanged curve and Spain symbolically at 6.50% (+13) in 10s but with the short end trading up to 25bp weaker and flattening. EUR flirting with the 25 handle.

Good strike-related traction on Oil with Brent hurdling first 100, then 101.

Central Banks came, stood and delivered… just not much more, although the (nightly) POBC cut (1 YRS by 31 to 6% and deposits by 25bp to 3%) had not really been foreseen. Second Chinese cut in as many month, the last one having been on 07 Jun (as well just ahead of the ECB meeting, then by 25 basis points to 3.25% and 6.31%). The Chinese move was good for a small uptick, rapidly squashed by the European serving.

ECB quarter cut and BoE GBP 50bn additional QE to GBP 375bn both already in the valuation ramp-out of late.

US data getting outranked by the ECB press conference, although job numbers were better than expected (ADP +176k, fcst 100k after revised 136k, and Claims only 374k, fcst 385k after revised higher 388k). Continuous claims still on the rise, though, with 3306k, fcst 3300k after revised higher 3302k.

Equities down 1.5%-2% from the post-POBC hiccup, before bottoming out. Tame Bund futures behaviour. Down a little on POBC, up a little on ECB and following ROff. Back to morning levels thereafter, even curve wise. Italy a tick weaker still and Spain out by 20 bp. Hmmm… Non-event. Although the EUR crashed 120 pips lower through the 24, weighting on commodities. Then came the ECB press conference…

Fierce Super Mario show: Draghi squarely sending responsibilities back to political / governmental senders. The ECB’s (independent) job is to channel money to banks. Final. And is responsible for price stability. That’s the mandate. Basta. And the ECB counterparts are to be solvent.

No goodies. No sweetener. None. Non-conventional measures not even discussed.

Interesting comment on lack of capital flight out of the EZ per se, so there is capital flight, just from the softer countries to the Core.

Year-end economic recovery seen by Draghi on the back of low nominal and negative real rates. Not certain the market will see this as being the most convincing argument to pile in on risk.

And the ECB is definitively on a more relaxed schedule than the borrowers with regards to new functions.

The ECB stand can be summarized in the very Northern sounding “There’s nothing without conditionality!” (Immediate reaction to this comment were additional 5 bp on the Peripherals to start with and twice that on the short end).

Standing firm and delivering stern. Ouch!

We remain in a formal and mental blockade between the North and the South and different opinions on who’s responsible for what. Formalities being what they are, we’re a bit stuck, here. Next step for European leaders: haggle on ESM details. Fast. Oh, dear, oh, dear. Come on, haggle! (Life of Brian)

With Draghi revealing himself and the ECB as wrecking ball to cheap hope dope, looking forward, things don’t look easy. Looks like this could be drawn out into a long, hot summer. Next ECB meeting 02 Aug. After the FOMC on 01 Aug.

ROff of course speeding up during the rest of the afternoon. Weak ISM at 52.1 (fcst 53 after 53.7) not helping, but not adding much either. Witnessing the sell-off in Peripherals, EGB outperformance rather tame (might end up having to pay?) and relative equity resilience surprising (maybe didn’t get the message?). Equities… Italy back very close to 6% and Spain at short of 6.75%, too close not to test 7% on any given hick-up.

New Issue supply restricted to a EUR 250m 5 YRS tap by French SME agency OSEO at MS +45.